Goldman Sachs took fire Tuesday for taking "short," pessimistic positions against the US housing market, but here's another view: The most damaging financial activities in the lead-up to recession were arguably the ones that were optimistic or "long" on the housing market, not the short bets.

It was the great housing bubble that created big problems for the US economy.

The bust, and Goldman's alleged profiting from that bust, couldn't have happened without the boom. And the boom was fueled by many financial players – firms like Goldman Sachs but also federal regulators and policies crafted by Congress – who had earlier taken a remarkably one-sided upbeat view of housing.

This doesn't mean the Senate's Permanent Subcommittee on Investigations can't raise questions about Goldman's actions on the short side of the housing market. And the subcommittee did so Tuesday in a hearing with Goldman officials.

"[Goldman] was betting heavily against housing market," and making profits on those bets in 2007, Sen. Carl Levin (D) of Michigan said as the hearing opened Tuesday morning.

The long and short of it

A central line of inquiry for Senator Levin was whether it was ethical for Goldman to go short on housing in its own trading positions, while at the same time continuing to market securities on which customers would be on the long side of the market.

"Should we [in Congress] act to bar similar actions in the future?" Levin wondered aloud. The hearing comes as Goldman is also facing a civil fraud lawsuit.

It's an interesting debate. On one side, many economists say it's up to the various parties in investment deals to do their own research and live with the consequences of their investments. Buyer beware. On the other side is Levin's argument that Wall Street banks have lost focus on serving clients and become too focused on their own trading activities.

Regardless of the answer on that issue, by 2007 the housing bubble had already built up and begun to pop. If Goldman made profits on the housing bust in 2007, many other financial firms did not. One of them, AIG, ended up getting a huge taxpayer bailout. (And yes, a large chunk of that bailout money went to Goldman, as AIG paid off deals it made with the investment bank.)

A baked-in problem

But the basic problem for the economy was already baked in.

Although a deep recession wasn't viewed then as inevitable, home prices had diverged sharply from average incomes in many markets, creating the risk of a bust.

Actors at all levels of the housing market had contributed to the boom in home prices. Lenders like Countrywide and Washington Mutual made high-risk loans available to people with poor credit quality. Investment firms including Goldman expanded the market for such lending by packaging those weak mortgage into complex securities. Investors bought real estate and housing-related securities.

Congress, meanwhile, had over many years put in place policies designed to promote home ownership, from tax breaks to efforts to encourage loans to higher-risk borrowers.

An underlying assumption for many of these actors, as home prices rose to historically lofty levels in many markets, was that home prices tend to rise without much risk of falling. That view proved wrong, with heavy consequences for the US economy and for millions of people who bought homes in recent years.

Bottom line: A case can be made that, amid all the talk this week about bets against the mortgage market, the big problem was too much of a "long" view on housing.